Bessey Aviation is considering whether to lease or purchase an aircraft to transport its executives between company facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below:

Cash Flows After-Tax

End of Year

Lease

(cash flows are all negative)

Purchase

Yrs 1-4 cash flows are negative; Year 5 is positive.

1.

(40,000)

(68,454)

2.

(40,000)

(59,110)

3.

(40,000)

(63,596)

4.

(40,000)

(66,633)

5.

(40,000)

30,056

9.Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt.

10. Given the above cash outflows:

a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost of debt.

b) Which alternative do you choose?